Korea and Japan pledge joint action on exchange rate free fall

The finance ministers of Korea and Japan jointly addressed the recent drastic depreciation of their respective countries' currencies against the dollar, signaling potential market intervention on Tuesday.

Korea’s Financial Minister Choi Sang-mok, right, and his Japanese counterpart Suzuki Shunichi pose for a photo during a meeting on the sidelines of the G20 Finance Ministers and Central Bank Governors Meeting in Washington on Tuesday. [MINISTRY OF ECONOMY AND FINANCE]

The finance ministers of Korea and Japan jointly addressed the recent drastic depreciation of their respective currencies against the dollar on Tuesday, signaling signaled potential market intervention.

Both the won and the yen experienced a steep plunge against the greenback earlier in the day, prompting the relevant currency authorities to step in with verbal warnings.

Korea’s finance minister, Choi Sang-mok, and his Japanese counterpart, Suzuki Shunichi, "expressed their intention to take appropriate action against excessive movement [in foreign exchange rates]," Korea’s Ministry of Economy and Finance said in a statement on Wednesday following their discussion in Washington on the sidelines of the G20 Finance Ministers and Central Bank Governors Meeting.

In the first in-person talks between the two since taking office, Choi and Suzuki "shared serious concerns about the recent significant depreciation of the Japanese yen and the Korean won," according to the ministry's statement, which is widely interpreted as joint verbal intervention from the economic leaders of the neighboring countries.

The won-dollar foreign exchange rate reached a 17-month low to close at 1,395.30 won on Tuesday, and even momentarily touched the 1,400-won mark mid-trading. Meanwhile, the yen-dollar rate plummeted to its weakest point in 34 years, breaching the 154-yen threshold.

On Wednesday, the Korean currency traded at a relatively moderate level compared to the previous day to close at 1,386.80 to the dollar, down 7.7 won from the day prior.

Bank of Korea Gov. Rhee Chang-yong also noted that the exchange rate movement “is a little bit excessive, judging from what could be justified by market fundamentals," during an interview with CNBC in Washington.

Citing “not only the strong U.S. dollar but also the geopolitical tension in the Middle East” as well as “the weakening of the yen and yuan” for the steep depreciation, Rhee said that “we are ready to deploy stabilization measures if the volatility continues, and we have enough resources and tools to do so."

The growing geopolitical tension between Iran and Israel has been driving demand for safe-haven currencies, while the robust U.S. economy is further strengthening the dollar.

The won-dollar exchange rate has surpassed the 1,400-won threshold only during three incidents so far: the 1997 Asian financial crisis, the 2008 global financial crisis and the 2022 post-pandemic monetary tightening.

However, the risk may not be as severe now as it was in the earlier scenarios that featured a breach of the threshold, analysts suggest.

Some forecast the latest depreciation of the local currency to possibly benefit Korea in terms of exports, with only a limited impact on foreign investor sentiment.

“While the currency is weak, the scale of depreciation is not overly significant; the actual market impact of the weak won may not be as strong as the psychological one,” said Lee Eun-taek, an analyst at KB Securities, on Wednesday.

Although the weak won and raw material price hikes are likely to hamper domestic consumption and drive up consumer prices, the analyst suggested that the depreciation may work in favor of Korea’s export sector with the rebound in chip shipments.

“In the past, a steep currency depreciation often coincided with the economic cycle taking a downturn, which meant that the weak won’s positive impact on exports did not show, but that is not the case this time,” said Lee.

Park Seung-young, an analyst at Hanwha Investment & Securities, also noted that “Korea’s trade balance, which posted a deficit of $18.5 billion in the fourth quarter of 2022, came in at a surplus of $9 billion in the first quarter of this year,” indicating that the current situation is different from that of November 2022, the last time the exchange rate threshold was surpassed.

Park added that “the market consensus anticipating enhanced performances by export-heavy companies will hold strong if the weak won is a reflection of a robust U.S. economy.”

Kiwoom Securities analyst Han Ji-young said on Tuesday that “the conventional formula of the-weak-won-equals-foreigners-selling is not holding up anymore,” noting that the foreigners net purchased some 18 trillion won in the Kospi bourse this year while the exchange rate rose over 7 percent.

Foreign investors offloaded a net 944 billion won from Monday to Wednesday in the Kospi and the Kosdaq markets. But throughout April as a whole, foreigners net purchased 1.97 trillion won, meaning that the short-term selling spree is not likely to have a significant impact on the dollar supply in the market.

"The current spike in the won-dollar exchange rate is likely temporary overshooting behavior, rather than an issue of market fundamentals, meaning that the possibility of a significant price adjustment across the entire market is low,” suggested Han.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]